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Biosphere bookkeeping

An economic transformation to rival the Industrial Revolution is on its way – and this time nature will be properly valued, predict John Elkington and Alejandro Litovsky.

Almost 200 years ago, Thomas Newcomen built the world’s first commercially successful steam engine in order to pump water out of deep coal mines. In the process, he handed humanity the keys to the Earth’s fossil-fuel resources, an event which, in turn, helped fuel the Industrial Revolution. Ever since that moment, the natural world has been in retreat, equally undervalued by economists, accountants, engineers and politicians. Now, however, a new revolution is under way. Once again, it is ignited by resource constraints, but this time a small group of innovative economists and accountants is leading the charge, alongside activists, engineers, scientists, business leaders and politicians.

Take Pavan Sukhdev, former managing director of the markets division of Deutsche Bank who, later in 2010, will launch the findings of the TEEB study – the acronym stands for The Economics of Ecosystems and Biodiversity – an initiative of the United Nations Environment Programme (UNEP). The focus of his work, and that of a growing number of economists, is the creation in the coming decades of what we call the Biosphere Economy. The evidence suggests that this will be as profound in its impacts as the original Industrial Revolution, except this time the economy will be working with the grain of the biosphere, rather than against it.

The financial value at stake is mind-boggling. The TEEB analysis, for example, concludes that the degradation of the Earth’s ecosystems and biodiversity due to deforestation alone costs us natural capital worth somewhere between US$1.9 (13 trillion yuan) and US$4.5 trillion (31 trillion yuan) every year. And, on the other side of the equation, the business opportunities likely to be created by the shift in the prevailing market paradigm are astonishing.

Spurred on by such findings, extraordinary new insights are now flowing from the cutting edge of ecosystems science. Today we understand, for example, that tropical rainforests act as freshwater pumps. The Amazon generates and pumps into the atmosphere some 8 trillion tonnes of water a year, feeding into an aerial belt of water vapour that connects tropical forests across the globe. Cut down the Amazon, we are told, and rainfall will decrease not only in South America’s trillion dollar agricultural hubs, but also as far away as China.

Whether we like or not, whether we plan for it or not, we are entering the Biosphere Economy – a future where business and politics increasingly take account of natural capital, bridging the gap between man-made assets and nature’s ecological infrastructures, which underpin our economies and societies. This Biosphere Economy is moving on from “intangible” ecosystem services such as naturally produced water, soil and clean air, to identify a set of tangible issues for business. And, in the process, it is shifting the focus from business “externalities” such as pollution, deforestation and resource degradation, to a re-consideration of market and corporate valuation mechanisms.

As scientific understanding of the value of ecosystems and biodiversity grows (value that until very recently has been taken for granted or simply discounted from the equation) we see growing interest in pricing the services key ecosystems deliver, such as flood controls and rainfall regulation, creating the mechanisms that enable related payments to be made and developing the businesses that will drive new forms of market value.

One thing is clear: the business-case arguments around ecosystem services promise to be significantly more engaging for many business leaders than emotional appeals to protect biodiversity. As Mikkel Kallesoe, ecosystems programme manager at the World Business Council for Sustainable Development (WBCSD), told us: “The concept of ecosystem services is more tangible for business than biodiversity. We are talking about freshwater, crops, pollination, fibre and erosion regulation. These units fit with other inputs in a business model and a production process. We are going to see a profound shift from dealing with environmental issues as risk-management challenges to developing new business opportunities by acknowledging a company’s dependence on ecosystems.”

Sadly, mankind is often painfully slow to learn the lessons that nature sends, with the result that history shows that almost all civilisations collapse. Not that collapse is inevitable, if we choose to wake up in time. In 1998, for example, devastating floods in the Yangtze River basin caused a staggering 136 billion yuan (US$20 billion) in losses and affected some 250 million people. Swiss Re, the reinsurance company that had underwritten some of the risks, and the Chinese Academy of Sciences identified the connection between the floods and the loss of forest cover in the upper basin.

As a direct result, the Chinese government developed plans to convert vast areas of cropland back into forest and grassland, banning a number of industries and planning investment in natural capital assets (such as forests) totalling some 680 billion yuan (US$100 billion), to regulate water flows for hydropower, irrigation and flood prevention.

Most business leaders, and many politicians, remain blind to these great challenges, viewing them as the preserve of governments. But a growing number of global business leaders sense that disruptive change is coming. Earlier in 2010, for example, the chief executives of 29 global companies involved in WBCSD – including Alcoa, Boeing, Syngenta, Sony, E.ON, Procter & Gamble, Duke Energy, Toyota, Infosys and Volkswagen – unveiled their “Vision 2050” report. They forecast a future in which market pricing accurately reflects the ecological costs of doing business.

Whether you think of companies, sectors, cities or entire regional economies, there will be winners in this new Biosphere Economy of ours and there will be losers. Swiss Re knows this, as do the chief executives who signed off on the WBCSD study. A key question is: how do you spot the difference early enough to act?

One possible way will be to look at how ecologically overdrawn an economy, industry or company is. Later this year, Trucost, a firm that is introducing environmental valuations to the business mainstream, will publish a report concluding that the world’s 3,000 biggest public companies had “ecosystem liabilities” of US$2.2 trillion (15 trillion yuan) in 2008, on average representing more than 30% of their combined profits. Once such information is properly absorbed and acted on by financial institutions and markets, everything will change.

John Elkington is executive chairman of Volans and non-executive director of SustainAbility. Alejandro Litovsky is director of the Volans Pathways to Scale programme.

Externalities and unsustaionable economic growth

If deforestation lead to the loss of wealth of trillions of U.S. dollars, then, palm oil, paper pulp, beef and soybean are crops that may never be seen again.

National wealth might increase. Unsustainable economic growth would, by definition, be reduced, as would gini coefficients (i.e. the gap between rich and poor).

But Biospheric Economics is just another name for green accounting and sustainability. However, it may be that such a change in name is all it takes to induce major corporations to conduct their businesses sustainably.

Forests support ecosystems. Plantations are by definition mono-cultures.

The article suggests that forests are one of the natural assets in which China invested after the floods of 1998. This is misleading. Forests and plantations are very different.

The very large area of industrial-scale plantations which China has subsidised tend (like tree plantations elsewhere in East Asia) to be of remarkably poor quality.

Usually, major plantations support negligible biodiversity and fewer livelihoods than forests - and are much more susceptible to disease and fire than forests are.

When evaluating the carbon content of forests, their biodiversity is taken into account. Rashly, current REDD proposals do not do so. Healthy, balanced biodiversity is essential if trees are to reproduce.

No carbon credits should be given to forests which can not reproduce naturally – there would be no point in filling up a car’s fuel tank with petrol if the car didn’t have any wheels!